The Blending of Banks & Insurance

For bankers like Don Page, president and chief executive of First Security Bank, the emerging link between banks and insurance can be summed up in a single word: survival.For a long time now, insurance companies, brokerage houses, savings and loans, credit unionsu00e2u20ac”they`ve all been allowed to get into our commercial loan business, Page says. If we`re going to have our services opened up to the greater market, we should have the opportunity to offer the services they`re offering.But Page, whose Sarasota, Florida bank opened its doors last spring and now has about $18 million in assets, quickly adds another reason why First Security expects to consider selling insurance products to its customers. We see it as another service to our community, he says. But obviously, it will enhance revenues.There is no doubt that the transformation of the nation`s financial services arenas is breaking down the barriers that separated banking and insurance for decades. The stream of judicial and regulatory decisions that has opened the way for bankers to sell insurance products will, in all likelihood, soon be capped by federal legislation that will permit banks to own the companies that underwrite the insurance policies that many are already selling. Bankers, analysts, and professional consultants all say that the question is no longer if community banks should consider insurance sales, but rather when, how, and through what channel they should be making the products available to their customers.Banks have got to be thinking about insurance sales, Paul Idzik, a partner in the financial services practice at Booz, Allen & Hamilton, says. They`ve lost credit cards and they`ve lost mortgages. They`re losing mutual funds. They`ve got to get their act together.After a decade of accelerating change in the structure of the nation`s financial services markets, consumers have become accustomed to dealing with faraway financial institutions. Credit card companies broke the ice, and long-distance mortgages followed, Idzik says. Folks` traditional attachment to their home base has declined for products like thatu00e2u20ac”once you`ve written a $200,000 check to a mortgage banker in some other city, you`re probably willing to think about a $500 deductible auto policy.At the same time, though, Idzik continues, folks` preference for doing their banking locally has not declined, so banks have an incredible platform for sales.The model offered by the April 1998 merger of Citicorp and Travelers Group suggests the future lies in a broader, eventually all-encompassing range of financial products. Citigroup, the financial giant created by the merger, will, its executives hope, be allowed not only to take deposits and make loans but also to underwrite and trade stocks and bonds and, on top of that, underwrite and sell a full array of insurance products. Thus, such a convergence of financial markets will increase the pressures even on smaller institutions to take advantage of every competitive opportunity.We believe there are probably three core disciplines that you have to be good at in today`s market, says David Holton, president of Wachovia Insurance Services in Winston-Salem, North Carolina, a subsidiary of Wachovia Corp. The first, he says, is old-fashioned banking, including traditional transaction accounts, lending activity, and cash management services. The second is savings and investment, which covers products and services ranging from certificates of deposit to mutual funds, intended to help the bank`s customers build their wealth. The third core discipline is risk management, he says. And that means how you leverage your balance sheet and the assets you`ve accumulated as you`ve amassed wealth. It also means how, as you make plans and preparations to eventually transfer that wealth, you manage the risks that are out there and what can cause those plans to go off track.If you see banking in a holistic view like that, Holton adds, then insurance becomes a critical element, much more than just the wave of the future or the next product innovation.Customer service should be the primary consideration for bank directors determining whether their institutions should embrace insurance products in one form or another. The board is going to want to know several things, says John Pottridge, head of Pottridge & Associates, a consulting firm in Alexandria, Virginia. Is this going to help our customers? Is it going to enhance their view of our bank? Is it going to complicate their lives or will it be easier to use than what they have now?The board of directors, according to Pottridge and other consultants, must make sure that short-term profit opportunities from insurance or any other fee-generating product are weighed against the long-term benefits to the bank`s customer base. The board has got to be asking, `Is this going to be good for our customers, because our customer base is our only real asset,` Pottridge says.Untapped potentialThe evidence of mushrooming opportunities for bank insurance sales is reflected in polls and other consumer research. Rising numbers of consumers are already aware that they can buy insurance from their banks if they want to, says Elliot Savitzky, senior vice president and director of the market assessment practice at Opinion Research Corporation International. But consumer polls conducted by the company make it clear that banks have only just begun to develop the insurance market.A series of Opinion Research polls taken between August 1996 and July 1997 showed that 61% of consumers knew that insurance was available through banks. But in August 1996, just 6% of those who owned or were likely to buy life insurance said that they actually had bought or planned to buy it from a bank. And a July 1997 poll showed similar disparities in actual purchases of homeowner, auto, and annuity policies and concluded that, overall, just over one in 10 consumers had purchased an insurance policy of some kind through a bank. The same series of polls indicated, however, that the potential market for bank insurance purchases is substantially larger, including 42% of consumers who say they would be at least somewhat likely to consider a large national bank for purchasing insurance. Most of what is purchased now are annuities, but there is interest in life, homeowners, and auto policies, Savitzky says.Similarly robust growth prospects are apparent in market statistics gathered by Datamonitor Inc., a New York research firm. On a dollar basis, banks` total revenue from sales of insurance products reached $3.11 billion in 1997, the last year for which actual figures are available. Michael Shapiro, a Datamonitor analyst, forecasts revenues will leap to $17.8 billion by 2002 from an estimated $4.5 billion in 1998, while premiums are expected to nearly triple from $40.2 billion in 1998 to $114.1 billion in 2002.Annuities accounted for the bulk of banks` revenue from insurance product sales in 1997, bringing in $1.32 billion, according to Datamonitor, compared with $797 million from sales of life and health policies. But looking ahead, sales of life policies are projected to gain rapidly and eventually outpace sales of annuities. In 2002, the company estimates, total revenue from sales of life policies will reach $6.05 billion, while annuity sales will bring in $5.04 billion. Sales of property and casualty policies, meanwhile, are forecasted to surge more than tenfold by 2002 to $3.14 billion from $247 million.Enhancing customer relationshipsApart from the enormous dollar volume of the business represented by the confluence of the financial markets, community banks have compelling reasons to consider offering insurance. Among these are their well-established customer relationships and the valuable reservoir of information generated by these relationships.There were two overriding reasons why we got into the insurance business, says Jack Cussen, executive vice president of Summit Bancorp, a Princeton, New Jersey-based institution with about $20 billion in assets. Number one is that it is another product for our customer, and it builds our relationship with that customer. Number two is that it generates fee income.Ed Ray, chairman of the Financial Institutions Insurance Association`s community bank council and director of AFLAC, a supplemental insurance company in Columbus, Georgia, says it is nothing less than crucial for small-town bankers to learn about the insurance business. If they don`t, they are ceding away a huge proportion of their market, Ray says. And particularly their business marketu00e2u20ac”because that`s the first part of their customer base that bigger competitors are going to come after.In practice, many small banks have made initial forays into insurance sales by establishing relationships with agencies to which they can refer their customers for insurance services. The advantages to the bank of an arrangement like that are that it doesn`t have to put in a tremendous amount of capital to start an insurance agency, says Chrys Lemon, a partner with McIntyre Law Firm in Washington, D.C., which advises banks on insurance sales matters. Most states have arrangements that allow insurance agencies to pay banks a fee for each customer referred.Some bankers view partnership arrangements with existing agencies as a way to familiarize their customers and their employees with the idea of the bank selling insurance, a concept they say is still viewed with suspicion by many on both sides.Are our customers going to look to us to be their insurance experts? asks Tom Lunak, president of Horizon Bank, a de novo institution in Pembroke Pines, Florida. I think some customers probably will. But the two have been separate for so long that it`s going to take either some customer education or just the passage of time before people get comfortable with the idea. Things do seem to be heading toward one-stop shopping, with this merger of insurance, investment services, and banking. But for some people, it still makes them very uncomfortable.Beyond the shock of the new, however, lie other risks that directors and senior management must confront.Conflicts with established businesses in the bank`s own community are an important consideration, says Richard Ledbetter, chairman and chief executive of First Place Financial Corp., parent of the First National Bank of Farmington, a New Mexico bank with about $700 million in assets. A lot of individual agents are your own customers, so you`re going to be taking business away from those folks by making insurance products available through the bank. Partly for that reason, Ledbetter says, an effort by independent bankers in New Mexico to arrange a statewide alliance with an insurers group didn`t really go anywhere.Chet Fenimore, a partner with Jenkins & Gilchrist, a Dallas law firm that works regularly with banks, says several of his firm`s clients had opted not to pursue insurance operations because they did not want to step on the toes of another well-established and well-respected businessman in their community. There has been a hesitancy to compete with someone who, historically, has not been a competitor, Fenimore explains. We have had a couple of situations where the client has said, `Well, I`d like to do that, but I can`t.`Smaller banks must also take care not to push too hard in developing new business lines, such as insurance, that are unfamiliar to them, cautions Richard P. Hunt, chairman of Kendrick, Pierce & Co., a consulting firm in Tampa, Florida. Hunt notes that there is a possibility that management will spread itself too thinly, on the one hand, or make excessive demands on staff members, on the other.You have to think about what kind of a strain this is going to put on the bank`s personnel, Hunt says. If you`re going to have to do internal accounting and paperwork on additional product lines, and if you have 10 people on your staff and they`re already bursting at the seams, then that`s not going to be a happy situation.Insurance operations make substantial demands on management oversight to ensure that the bank`s policies for customer service are consistently maintained and that administrative, regulatory, and liability issues regarding insurance productsu00e2u20ac”which may differ considerably from those bankers are familiar withu00e2u20ac”receive sufficient attention. To the extent that a bank wants to maintain close relations with its customers in all aspects of the business, obviously it loses some of that closeness when it refers customers to an outside insurance agency, McIntyre`s Lemon says. If the bank has policies about developing and sustaining relationships with its customers, it may or may not be able to make sure the insurance agency maintains those same standards.Jumping inA step beyond referral relationships, and, according to consultants, the most common way that banks have entered the insurance business, are acquisitions of agencies or agency companies. Acquiring an existing agency offers what many experts say is the most effective way to gain needed expertise quickly. Acquisitions also act as a catapult to get a new business line off to a running start.In New Jersey, Summit Bancorp started selling insurance in the early 1990s, Cussen says, beginning with a life insurance business that it built to $2 million a year in revenue over a period of six or seven years. When its success with life insurance led Summit to begin planning to expand into the benefits and property/casualty lines, the bank concluded that repeating its de novo strategy would have taken a prolonged periodu00e2u20ac”in other words, too long.So it really was a timing issue, Cussen says. We looked at joint ventures, we looked at outsourcing, and we looked at using insurance companies as direct writers. But we rejected those options for various reasons, and concluded that an acquisition was the quickest way to get in.Summit went on to acquire two benefits agencies and a property and casualty agency between December 1997 and October 1998. It will have insurance sales revenues of about $160 million this year, and growth is expected to run at about 20% a year. The insurance operation`s profitability, at 20% to 22% of revenue, has been in line with the bank`s expectations.Acquisitions of insurance agencies by banks have picked up steadily over the last two years, as data compiled by SNL Securities shows. The number of such deals rose to 45 in 1998 from 18 the previous year, with another 31 acquisitions completed between January 1 and July 27, 1999, nearly 50% ahead of the pace in the comparable seven months of 1998 and on track to show a substantial gain for the full year.Buying an agency is the favored method of many mid-sized community banks, which are feeling competitive pressure to get into the business, says Carmen Effron, a banking and insurance consultant and former head of insurance operations at BankBoston Corp. and Britain`s NatWest Bank. Effron notes, however, that there are numerous, occasionally subtle, aspects to consider in the selection of an acquisition target.A bank can buy an agency and learn about the insurance business, she says. But if it doesn`t bring in the right agency person, one who wants to grow the business and who can stand being plunged into the bank culture, then it has bought the wrong agency.Melding the vastly different business cultures of banking and insurance represents the single largest obstacle to banks seeking to enter the insurance business, no matter what their size. Andrew Singer, a consultant in Mamaroneck, New York, whose 1998 Bank Insurance Productivity Study is the most recent in a series of detailed analyses of bank insurance operations based on responses to questionnaires, reported that personnel obstaclesu00e2u20ac”usually finding the right people to sell the productu00e2u20ac”constituted the most frequently cited difficulty encountered by banks seeking to build insurance sales. That was followed by cultural or management hindrances, e.g., bankwide acceptance of the insurance product line as a mainstream product, according to Singer, who is managing director of the Bank Insurance Monitor Research Group.Historically, bankers have fought tooth and nail to avoid calling themselves salesmen, Jenkins & Gilchrist`s Fenimore says. But insurance salesmen make a living that way, and they`re used to that sales culture. So you have a gap to bridge there.Once a bank has concluded that its market, business, and management circumstances warrant the introduction of an insurance operation in one form or another, management`s commitment to seeing the project through becomes paramount.You have to be totally committed to the strategy, Wachovia`s Holton says. It`s hard to do even when you are totally committedu00e2u20ac”it`s impossible if the bank`s board is looking at this only over the short term. There has to be a vision and some patience. This is something that has to be built, and things that have value like that typically take some time to build.Effron regards management commitment as the first and most important of four critical elements that boards must consider in assessing the insurance issueu00e2u20ac”the M in what she calls her MINE theory.For senior management to be committed, they have to look at the returns on the insurance business, which are quite fat compared with most banking products, but they have to ask whether the returns are big enough to justify the effort and expense involved, and they have to understand the business, she says. Progress is not going to come all at one time. The fact of the matter is that each program takes a lot of time and effort and process, and management has to weigh how to do it in the most effective manner.That means matching the distribution and the product to the customer base, so that the economics of profitability are appropriate to that customer base, she continues. With relatively inexpensive term life policies, for example, face-to-face meetings with customers are prohibitively costly, but carefully targeted direct mail programs can make money.Beyond commitment, Effron points to three more elements that must be in place and that require board oversight. The insurance operation must be fully integrated into the bank`s day-to-day business; niche opportunities within the bank`s customer base must be effectively exploited; and, finally, the bank`s staff, customers, and shareholders all must be educated, so that they clearly understand what the goals of the program are and what outcome is expected.The reason that the margins on insurance products are so fat is that these products are harder to sell than banking products, Effron says.Measuring performanceBenchmarking the revenue and profitability growth of banks` insurance operations, once they are set up and running, remains an uncertain proposition. The information is all over the board, Wachovia`s Holton says. While he and his colleagues came up with their own benchmarks when they started the company`s insurance operations four years ago, We`re not sure that the measures we set out were the right ones, he now says.If you start from the premise that you have to be in this business because it`s part of your core strategy, then you could make the argument that you have to be there even if it`s not profitable, he continues. So it`s a matter of managing the process for profitability, whatever that number turns out to be.Holton says Wachovia had been able to achieve a much higher closing ratio than had been expected, but that it viewed as a more important measure of its success the positive response from customers on being approached about insurance. We`ve been surprised at the way the consumer has perceived us, he says. We thought it would be positive, but what we`ve found is that even when we don`t sell a product, we are viewed by the customer as adding value [simply by offering it], and that has led to benefits in other areas of our banking relationship.Despite its progress, Holton identified at least one area where Wachovia`s insurance program has room for improvement. He says the company had been less successful than it hoped in penetrating its own bankers` consciousness about insurance. Nothing moves as fast as we would like it to, he says. Bankers have so many products and services that they can offer. Trying to get shelf space and mind space and to get them trained has been a heavy task. We thought we`d get through it faster than we have.Especially for bankers at smaller institutions, like Don Page in Sarasota, the possibility of moving into insurance offers an alluring prospect, one that is not unrelated to the community bank`s core activities.With all the merger mania going on, there still is some good business out there when you can find the round peg for the square hole, Page says. At big banks, the rules are set in concrete. But we sit with our customers and get to know them, which would seem to be an ideal situation for cross-selling products. Once we`ve got them in here and they feel comfortable with us, the ability to sell them insurance should come relatively easy.